Yes, it’s true – the stock market has performed very well in 2018, setting record highs across several major indexes and valiantly rallying in the face of every crisis it’s faced. If you’ve been paying attention to financial news, hearing about rip-roaring equities was nearly unavoidable.
But while investors are busy hooting-and-hollering about their portfolios during this historic bull run, a closer look at what actually has been happening in the market this year could be cause for some serious concern.
The S&P 500 is up over 7.7% on the year, which is great (albeit not as good as 2017, when the index climbed almost 20%), and significant growth during an international trade war should be something to celebrate – because at face value, it looks like American companies are universally having a good 2018.
However, upon further inspection, it becomes quite easy to see that most of the market’s gains this year have come from a small handful of some very powerful corporations.
A highly concentrated market, which many investors fear is a sign of impending doom, has quickly developed as FAANG companies like Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) have posted huge returns so far – the former rocketing up 65%, and the latter enjoying a 30% bump.
In fact, the market is so top heavy now, that the top-10 performing S&P 500 stocks have accounted for 53% of the total return of the index this year. By comparison, in 2017 – where the S&P exploded up almost 20% – the top-10 performers of that year were responsible for only 30% of the index’s gains.
That means that the S&P 500, a universally accepted gauge of economic health, has gotten 76% more concentrated since last year.
The FAANG group of companies, which includes Facebook (NASDAQ: FB), the aforementioned Amazon and Apple, Netflix (NASDAQ: NFLX), and Google (NASDAQ: GOOGL), are mostly to blame in this case. In addition to having impressive years so far (outside of Facebook), these stocks represent some of the largest companies in the world in terms of market cap, with Apple leading the group at $1.1 trillion.
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As a result, just these 5 companies make up 13.9% of the S&P’s total market cap – a staggering figure that has investors worried. Many of whom believe that the market’s prosperity is directly tied to how well the FAANG stocks perform – and the scary thing is, they’re probably right.
But thankfully, it’s probably nothing to be afraid of.
If you look at the distribution of equity returns across the entire market, over long periods of time, you’ll see that any major long-term market trend has largely been driven by a small group of stocks that are really kicking some serious butt.
These companies raise the bar for the rest of the market, killing-off weak performers and dragging a few other quality stocks to the top, as investors pile-in to equities franticly.
The net result by the end of the year is great for the market, the rock-star companies that led the way, and investors who went along for the ride.
So, while it may be disheartening to know that over half of the market’s gains this year can be attributed to a handful of key S&P 500 stocks, just know that what investors are currently experiencing is not the exception, but the norm.
Yes, the market may be more concentrated now than it was last year, but that doesn’t mean that it will continue in that direction, and that especially doesn’t mean that equities are a house of cards waiting to fall…
…at least, not yet.